In my Emerging Trends presentation I have a line about the choice facing developers in 2009: "They can head out to the golf course or go into the fetal position." The black humor seems always to get good laugh, but the reality is anything but funny to an audience of cringing entrepreneurs.
Construction loans are about as easy to find today as an Ivory Bill Woodpecker. Even if you have a bullet proof build-to-suit deal what lender will consider giving you a hearing about financing? Bankers all uncomfortably must focus their attention on what they may have unwisely financed in recent years--underway or just completed projects that have no way to meet pro formas in the cratering economy and have dwindling prospects for takeouts. In every major market, work has shut down on half built towers, testament to looming troubles.
For projects opening in the near-term, anemic to moribund demand signals major heartache. Ironically, developers and construction lenders had been relatively restrained except for overdeveloping condominium towers in many places. But the wholesale tenant retreat coupled with the evident protracted economic downturn translates into a heap of bad timing for builders and their bankers. This time round lack of demand trumps reasonable supply.
Flagging condo sales now get eclipsed by sagging hotel occupancies and corporate layoffs. Office markets brace for tenant downsizings and increasing amounts of shadow space. But the big disaster area will be retail. If you had planned to lease up your new shopping center over the next year, think again. After Christmas, many chain stores will go dark in a bankruptcy bacchanalia.
At some point, high construction costs will nosedive-you would think material costs have nowhere to go but down as worldwide construction activity abates in the global recession. So that´s good news for anyone who can find financing unless governments around the world prime the pump with infrastructure projects and suck up materials.
And once demand improves, developers should be able to restart activity quickly. At that point, undoubtedly pent up interest will exist for new, state-of-the-art projects. But no one seems to expect any economic rebound next year or in 2010. Jobs losses tend to extend into the start of economic recoveries and real estate rebounds typically lag as a result. We may have to wait until 2011 or 2012 to get development untracked again.
Let´s hope green fees reflect the lean times. Typically, after only nine months, we need to get out of the fetal position.
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
